Ukraine's prime minister, Yulia Tymoshenko, was today under pressure to concede defeat in the country's presidential election after international observers hailed Sunday's poll as fair and "truly competitive".

Observers from the Organisation for Security and Co-operation in Europe (OSCE) said there were no indications of serious fraud and described the vote as an "impressive display" of democracy. "For everyone in Ukraine this election was a victory," João Soares, president of the OSCE's parliamentary assembly, said.

With 98.8% of the votes counted, the Russian-leaning opposition leader, Viktor Yanukovych, had a clear 2.9% lead over Tymoshenko. But Tymoshenko has refused to recognise her opponent's victory, and according to local media reports she has ordered her lawyers to challenge the result in court.

Tymoshenko's campaign declined to comment on the reports, but her parliamentary allies repeated allegations of widespread fraud.

"A decision has been taken to challenge results in the individual polling stations and to demand a recount at those stations," said Yelena Shustik, a deputy with her parliamentary bloc.

But the OSCE's comments will make it much harder for Tymoshenko to sustain a legal challenge against the outcome. The monitors hinted that Tymoshenko should admit defeat, noting that in any election there are "winners and losers. It is now time for the country's political leaders to listen to the people's verdict and make sure the transition of power is peaceful and constructive," Soares said.

Yanukovych's supporters have rejected calls for further scrutiny of the election. "There will be no third round," Mykola Azarov, deputy head of Yanukovych's Party of Regions, told parliament today. "They are dragging us into an unnecessary war."

The OSCE's emphatically positive verdict is in stark contrast to five years ago when Yanukovych's bungled attempts to fix the vote provoked the Orange revolution. Yanukovych subsequently lost a third round vote to Viktor Yushchenko, Ukraine's outgoing president.

"Some say the Orange revolution has failed. I say no. Thanks to the Orange revolution democratic elections in Ukraine are now a reality," said Matyas Eörsi, head of the delegation of the Council of Europe's parliamentary assembly. Ukraine's chances of joining the EU had been significantly enhanced, the observers noted.

Yanukovych – who tonight is due to address thousands of his supporters in Kiev – will move swiftly to consolidate his power. Tymoshenko faces the unenviable choice of resigning as prime minister over the next few days or watching her fragile parliamentary coalition collapse. After that a new pro-Yanukovych coalition is certain to force her out.

Yanukovych's Party of the Regions is likely to lure deputies from Yushchenko's Our Ukraine bloc – currently in coalition with Tymoshenko – as well as the Communists and other minority factions. Two possible candidates in the frame for the prime minister's job are Borys Kolesnikov, Yanukovych's close ally, and Yuriy Yekhanurov, a former prime minister from Yushchenko's bloc.

"There is a psychological aspect to Yanukovych's victory," one Ukrainian diplomat said. "Irrespective of the narrow gap between Yanukovych and Tymoshenko, for the political elite and for state servants Yanukovych is the winner." His inauguration would take place early next month, the diplomat said.

Yanukovych's task would be to form his own government, the diplomat said, since without one he would be a "lame duck" president. Once he had secured a parliamentary majority, Yanukovych could make his first foreign trip, probably to Brussels.

Analysts said that – unlike in 2004 – Ukrainians had little appetite for protest.

Yanukovych's urgent challenge as president will be to eschew populist gestures and restore the economy. Ukraine is facing serious fiscal shortages. The International Monetary Fund has refused to lend the country any more money until Kiev carries out previously agreed reforms. Since 2008 the national currency, the hryvnia, has lost 48% of its value.

A breakdown of the results showed that Ukraine remains deeply divided, with the Russian-speaking east and south overwhelmingly backing Yanukovych, and the Ukrainian-speaking west and centre, including Kiev, voting for Tymoshenko.

More than a million voters chose to vote against both candidates, reflecting widespread disillusionment in the country.